Bubble Up and Trickle Down Economics: What Are They?
Trickle down economics is the theory that if you allow more money to flow to the upper income class, people of this class will invest in business and spend more money, and the resulting overflow will trickle down to the lower income class, benefiting them as well.
Bubble up economics is the theory that if you allow more money to flow to the lower income class, people of this class will spend more money that will eventually rise up to the Upper income class, benefiting them as well.
The question posed here is which model is better for the economy as a whole? But the U.S. is a capitalist, free market system, isn't It? Doesn't the market decide who gets what, not the government?
The U.S. is far from a purely capitalist, free market society. There are numerous laws and tax codes that favor individuals differently, usually benefiting either the upper or lower income classes more. The market dictates much but certainly not all of "who gets what."
Our tax laws, of course, are the easiest example, with different tax rates applied to different income levels. But there are numerous other types of laws that benefit either the lower or upper income classes more, and stray from a purely free market or capitalist system model.
Laws that benefit the lower income class:
- Anti-blacklisting laws
- Protections for unions
- Child labor laws
- Racial, age, and gender discrimination prohibitions
- Employee rights laws
- Political donation restrictions (so that the wealthy can't steal elections)
- Minimum wage laws
Laws that benefit the Upper income class:
- Land and mineral ownership rights
- Capital gains benefits
- Corporate loopholes
- PATRIOT Act restrictions that limit off-shore dealings for individuals but not for business
- Lobbying permissions (so that the wealthy can influence new laws)
Still think we're a capitalist, free market system? This is how it would look if we were:
There are many strictly non-free market regulations that benefit one income class more than another. A "truly" free market society would have no restrictions, with businesses and individuals being able to do whatever they want:
1. Business hiring. Companies could hire children, at poverty level wages, to work in coal mines because they're smaller in stature and cheap. This was the case for a long time until laws restricting underage employment were made, as well as minimum wage laws.
An employee who causes trouble (asks for a raise or complains about unsafe work conditions) could be fired and other companies in the area notified that the individual is a "troublemaker," effectively ruining that employee's options for ever finding work. Anti-blacklisting laws came out of this practice.
2. Mineral resource rights. Someone finding a rich gold or oil reserve on their land could keep every penny of wealth from that land. Currently the resource is treated as a public asset and taxed at a much higher rate.
3. Political donations. An individual or company could give as much money as they wanted to a candidate, essentially ensuring their victory. We currently have many restrictions on how much an individual or business can donate.
Lobbyists could give money to politicians freely to "encourage" laws that favor the lobbyist are passed. There are restrictions here, but lobbyists certainly yield a lot of sway.
The list is really endless, and these are just some obvious examples.
Since we really aren't a truly free market system, how should we decide who gets more? Which economic model is better for the economy? The question is, if you're not going to insist that we should live in a purely free market system, how would you weight taxes and financial benefits to achieve the strongest and healthiest society as a whole: towards the lower or upper income class. What happens when we favor one class over the other? Here is a proposition of how each class might spend their extra money:
1. Vacation spending
- Lower: More likely on a destination closer to home, benefiting the U.S. economy more.
- Upper: More likely abroad, benefiting foreign economies more.
- Lower: U.S. products (bank savings, mutual funds)
- Upper: Foreign products (off-shore high risk/return ventures)
3. Running a business
- Lower: Create or expand a small business (certainly inside the U.S.)
- Upper: Move part or all of their business structure off-shore
- Lower: A family vehicle, economical, average performance, U.S.-made
- Upper: A high end vehicle, gas-guzzler, sexy, foreign-made
- Lower: More likely to spend on education, career advancement
- Upper: More likely to buy luxury items, boats, jewelry
- Lower: Adults more likely to pursue career advancement; children more able to afford college
- Upper: Already understands the benefits of higher education, can afford it, so probably no additional money would be spent here
7. Home purchase
- Lower: Certainly a U.S. home, maybe a first
- Upper: More likely a second home, possibly a foreign getaway
- Lower: Additional financial resources might mean a stay at home parent, more time with the family, relief from stress.
- Upper: Can already afford a stay at home parent, time with the family, relief from stress.
As you can see, when the lower income class spends money, it helps the U.S. economy more. As this list suggests, putting money into the lower income class gets that money working through the U.S. rather than foreign economies. It favors U.S. products and business, and provides for a healthier and more productive lower class.
Additional economic benefits accrue when the lower income class gets more. I would argue that when you shift money to lower income individuals, it will eventually end up in the hands of the upper class anyway, with these additional advantages:
1. Benefits every part of the U.S. economy. The money will cycle once through the economy before it gets to the upper class. On products and education, every part of the U.S. economy gets to "touch" this money before it makes its way into the upper class. This will benefit local businesses, liquidity, incentive for education and career advancement.
2. Incentive to invest in the U.S. The upper class will have more incentive to invest in U.S. businesses and the U.S. economy rather than abroad, since there's more money in the U.S. now to acquire. This provides additional stimulus to the U.S. economy rather than for some other emerging economy.
3. It adds to the U.S. tax base. Larger corporations often pay far less in taxes than the individual or small business, through corporate loopholes and shifting of businesses offshore. Money in the hands of the lower income class adds directly to products and businesses that increase the U.S. tax base. A higher tax base gives government more to improve infrastructure (transportation, health, schools), grants and loans for education and small business, and disaster relief.
Feed the roots and the tree will grow strong. Plant in the desert and the tree will die.
Allowing more money to flow to the lower income class, through tax breaks and incentives, benefits the U.S. as a whole far more than flowing money to the upper income class.
Of course the extra income will eventually end up in the hands of the wealthy anyway — that's where it goes. But at least the wealthy will have to earn it, investing more in the U.S. economy to eventually acquire it. The less wealthy will get to hold it for a while at least and develop a taste for it that might encourage them to acquire even more, spurring employment productivity, small business, and education.
The notion here is certainly not that people in the upper income class are undeserving. In some cases these people inherited their wealth. But in many cases, if not most, they got there as a result of extra effort, extra talent, and/or extra luck. Any or all of these go into becoming successful and are entirely worthy traits.
Yet, it would be healthier for society as a whole to even out the distribution between the haves and the have-nots — not in a Robin Hood sort of way, but in leveling out the playing field. This can be done with adjusted tax rates, investment in public schools, and cheaper and more available college and business loans.
"Bubble up" far outweighs "trickle down" in benefits to the U.S. economy. The U.S. started as a government "by the people for the people." Maybe it's time to really believe it.